Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory team.
Well, hello everybody! In this season of the podcast we are going to be talking about innovation and in particular how mature businesses can innovate their business models in this disruptive world. Certainly a topic that is very dear to my heart and a topic that I know many of our clients are concerned about. So, I’ve got an expert panel with me here today and these guys are going to join me for this episode and for the next three! So I’m delighted to introduce to you a couple of Australia’s leading experts on disruption and innovation, Steve Glaveski and Simon Quirk – welcome gents!
Both: It’s a pleasure to be here, thank you Martin – love the description, very flattered!
Martin: Well it’s absolutely warranted Mr Quirk as our listeners will find out shortly! So just a little introduction. Steve Glaveski, he’s got a background in professional services but he is the CEO and co-founder of Collective Campus which is an organisation that Steve set up to help do exactly this, to help mature businesses with innovation because so many of them in my experience and no doubt in yours, just can’t do it well. So welcome, Steve!
Steve: Thank you
Martin: And Simon Quirk has worked closely with Mills Oakley for many years. Again, he has a background in professional services, both law and financial services, but for some years now he has worked as a strategy consultant and has established and grown a number of start-up businesses in that context. Particularly Strategy Fusion. So welcome Simon!
For this first episode in the season I really want to talk about disruption and the problem that we see that many of our clients face in that they’re in this highly disruptive environment, business has I think never been less certain in a whole range of ways, through technological disruption, through the new political environment, globalisation, etc, etc. Many challenges and an awful lot of uncertainty for our business owner clients. Yet again and again we see them stuck in the old business models, the old ways that might have been very successful in bringing them to this point, but unable to innovate and disrupt their own business models. So I’d really like to explore why that is. So Steve I’ll throw over to you first.
Steve: Sure, so you touched on it there with technology growth. We’re sitting at a very interesting point in time, we’re more or less at an inflection point. With Moore’s Law, technology doubling every two years for the last hundred odd years, we’re getting to a point now where the coalescence of emerging tech like virtual reality, augmented reality, artificial intelligence, all that stuff is now – for so long we spoke about it but now it’s actually becoming applicable. And if you look at technology growth, so, to put Moore’s Law into perspective, if you take a one metre step today and double it every day – so one today, two tomorrow, four the next day, 8 the day after that, exponential growth – by the end of the 30th day you would have walked 1 billion and 49 million meters. So that puts Moore’s Law into perspective. So, up until recently you could put together say, a five year strategy, because not much was changing. But when you’re at that inflection point where, say you’ve got this steady line then suddenly it just goes through the roof, you can umm and ahh about what the next 3, 4, 5 years are going to look like – but chances are it’s going to look radically different to what you’ve ever known before. So as a result of that, you can’t go in there with these long-winded business plans that we’ve always done, and you need to go in there with I suppose an attitude of adaptability and change, and I guess that’s the creative thinking where you basically admit that – “all I know is I know nothing”, and the only way I’m going to find out the answers is to build something, a prototype, get out there and let the market tell me the answers and based on that learn as quickly as I can to figure out product and market. Now, the problem with most existing mature businesses is that they’re not built to do that – they’re built purely to execute upon an existing repeating business model that makes money today, made money yesterday, but may not make money tomorrow. But in order to find a new repeatable business model that’s going to make money tomorrow, then you need to fundamentally change a lot about the way they do business, their systems, their culture, their values, and we won’t talk about solutions just yet – but that’s ultimately what it comes down to, they’re just not built to do it.
Simon: I agree Steve, the mindset is really important as well – I think we’re at an inflection point both in terms of the disruptive forces coming to bear, but also an inflection point in the changes that have to happen within these organisations. Some people are waking up to it, some people know and as Steve said we won’t get to solutions just yet, I’m sure it’s around the corner Martin – but ah, what I think is, that there’s of people who are still – you know, they know it’s coming but they don’t want to really face up to it. Like, so, I’m in my mid, approaching late 40s but I’ll say mid, but ah, I think a lot of people of my cohort are, they’ve got another 20 years of work plus or minus, and I think a lot of our generation, I think they just don’t know what’s going to come to bear, a lot of them will be lucky to see out their careers with their existing career business model because the next two decades are going to unleash disruption like we haven’t seen to Steve’s point. Steve talked about culture and values, I think there’s a real piece there as well. There’s knowing what to do, but there’s having that ability to have a complete change of mindset and approach that is different from what they’ve known growing up for the whole 40 or 50 years that they’ve been on the planet, so I think that’s a real challenge, it’s going to take a mindset shift within these organisations which is hard – because of the structures that are in place, their background and you know, change is hard so, as I said we will go to ‘how’ in a minute, but, I think there’s major challenges and unfortunately I think we’re going to see a lot of the people who can’t adapt are going to fall by the wayside. I think we’ve already seen that within blue collar, the rise of the machines, and we’ve seen Brexit and Trump – people are starting to hurt because of this revolution which is not great, but I think it’s going to be unleashed very soon on white collar as well.
Steve: And the Committee for Economic Development of Australia released a report last year which found that more than 50% of these jobs are likely to be completely replaced in the next 10-15 years and that’s predominantly due to automation as well as things like outsourcing to lower income economies. That’s going to have a devastating effect. However, traditionally, with any new wave of innovation, it’s always created more jobs than it has destroyed. Now that’s not to say that trend will continue – if you look at the early 20th century, about 80% of Americans were farmers. Today that number is 2% but with the industrial age people moved on to do other things. However, the first 15 years of the 21st century what we’ve seen is productivity growth just skyrocket, but the labour force participation has actually decreased, so it’s the first time where that gap is I suppose getting bigger and bigger, and in the United States, 80% of GDP is attributed to by service jobs, and we’re getting to a point now – I mentioned earlier, the coalescence of all of these technologies, service jobs are at risk of being automated. And now that’s why we’re seeing a lot of I suppose, lower-class or middle-class America pushing back against that. That’s why we’re seeing Trump, we’re seeing people from Baltimore who – they don’t see technology growth, they see friends, family losing their jobs, they see factories shutting down, they don’t understand it – they’re not part of the conversation so they push back. The same thing happened over in Britain with Brexit. So, there’s a lot of factors at play here but it’s definitely a lot more uncertainty in the next 5 – 10 years than what we’re used to.
Martin: There are so many points there to pick apart, thank you gentlemen for that! Can I start with what you said, Steve, about many jobs and professions are going to disappear in the not too distant future. Just for those out there listening, can you give me a flavour of that, what are the type of jobs or industries that are most at-risk in this environment?
Steve: Anything that can be boiled down to a process can be essentially automated. By the year 2029, The Futurist by Ray Kurzweil from Singularity University suggests that computers will be almost, if not as smart, as humans. They will also have the ability to learn like humans. NPR.org, national public radio over in the States recently published a report on how likely is it that your job will be automated. So it wasn’t just your blue collar jobs anymore. We had things on there like paralegals and legal assistants, because a lot of that work is research-based and we’ve got technology now that can do a lot of that. There’s an artificially intelligent computer call ROSS that has actually been hired by a number of law firms to do such work, and the number was something like 93.5% likelihood that paralegal work will be automated. Same goes for financial reporting and audits – that was something like 94.5%. We’re no longer looking at simply taking blue collar jobs, factory jobs, automating it, automating the assembly line with machines – we’re talking about jobs that people have actually gone to University for, jobs that require critical thinking in some respects, but not necessarily critical thinking but they require human effort. Intellectual human effort – now that’s what’s being replaced, that’s what’s scary, and I don’t want to come across like a doomsday sayer,
Martin: You’re not Steve, you’re not!
Steve: I’m all about embracing technology and innovation and human evolution and all that stuff – but what I do see is that if this trend prevails, then we will probably see a much greater divide where jobs that require human thinking are restricted to really, really critical thinking as well as maybe some creative pursuits.
Simon: I agree Steve, I think it is that creativity and some of the things we’re going to be talking about today in terms of humans are going to have to be the ones who are adaptable and to deal with innovation so, those kind of skills the creativity and critical thinking are the ones that are going to be really sought after – and Steve you talk about the jobs now that seem very, to me anyway, quite obvious that are going to go – paralegals, research with AI, I get that – but there’s a next wave where people are thinking oh well, that makes sense … listeners might think ‘oh you know, that makes sense, computers are good with research’, but it’s the waves beyond that where jobs – at the moment – people don’t think are going to be impacted by technology but will be in the next wave.
Martin: Give us some examples of that wave, Simon.
Simon: Well look I think that there are things like even relationship-based professions like possibly recruitment and those sort of things, I think people get more and more used to dealing with technology and not needing like they have to meet someone – social interaction is going to be important – but they might feel they are going to get an even greater sense of comfort in dealing with technology so I think while at the moment there’s no reason why they can’t go that way, they feel like they want the relationship, so I think that it’s not going to be so cold and calculating, everyone will want to have relationships but we’ll just do that in different ways. I think there are a number of industries that are in the thinking space which are going to be taken over. So, creativity will be hard I think, for a long time, although probably will get there but not in our lifetime. There are a lot of jobs which people now think well, that requires him thinking, then there are things where you just scan something and spit out an answer, where AI and learning is going to go, I think it’s going to have some people’s heads spinning.
Steve: I’m glad you touched on that point Simon, two things that come to mind there, one on creativity – the Turing Test in 2014 which pitched humans against computers, it was the first time that computers convinced human judges that they were human. The test was based on creativity. The test was all about, you need to come up with a poem. You had a set of humans competing against computers, the humans failed to convince the judges that they were human – the computers convinced them. Not only is writing a poem part of the scope that AI is capable of doing, you’ve got AI out there that’s writing music. There’s particular AI out there that’s published something like 1 million songs and a number of albums as well. There was recently a trailer released for a film which was composed completely from artificial intelligence, it was like a 30 second trailer. So, this is when it gets, again, I’m not trying to call it you know, the end is near and all that kind of stuff, but if creative pursuits can be replaced then what’s left for us? And relationship development is another big thing, because if you look at a lot of industries out there, whether it’s real estate, banking, legal services, a lot of it is around that responsibility and trust, and there’s also the advent of block chain, whether or not that will become part of the everyday sort of landscape we don’t know but block chain can essentially, if executed well, replace a lot of work that exists purely to establish and maintain trust, so, that can replace a lot of these high income, highly educated jobs and that also is something we need to be thinking about.
Simon: And it’s difficult because a lot of people, I’ll go back to the people of my age group, they’ve got another 20 years so they see themselves ramping up they’re probably planning how that’s all going to look for their retirement and what have you, but then also when we grow up you could point out a particular career and you could say, I mean there are some things you choose quite early on, I want to be a doctor or lawyer or, a lot of these jobs will still be around but not probably as we know them now – or even an accountant or whatever it may be. They can point there, and probably in the 20th century they could have a pretty good idea of what their entire career would look like, well not anymore.
Steve: That’s a great point and that’s I suppose another conversation altogether around children’s education and our kids learning what they need to be learning today in schools to be adaptable tomorrow and to thrive and survive in what is a very unknown concept.
Simon: Yep, not even close I don’t think.
Steve: Anyway, we digress.
Martin: No, look, it was a fascinating digression guys! I want to bring it back to business owners and the failure that I perceive that business owners have to grapple with all of this. I want to pick up I mean you’ve mentioned kind of scare-mongering and ‘the end is nigh’ Steve and those kind of sentiments, and from what I see, that fear factor is absolutely part of it. People are afraid of this and the head goes into the bucket of sand and then they start rationalising and I’ve heard clients and indeed some of my own colleagues in the law firm go through exactly the same processes. Because just as you said, we’ve worked in the same way our whole careers, we’re generally white, middle-aged men and you know, we think and we’ve grown up in a certain way and it’s very hard to kind of change that mindset and particularly with the fear factor. So I see that as a big blocker in our client base. Simon, I wanted to talk to you about the Innovator’s Dilemma, a phrase coined by Harvard strategy guru Clayton Christensen. He, as I understand it, and I know you understand this much better than I do, he even kind of goes one step further and he says “the very reason why mature traditional businesses are successful, that is the reason why they can’t innovate”. Can you explain that to me?
Simon: Yeah, so, Steve touched on it before, is that success of executing on a business model that is repeatable and is being scaled and is driving success makes it much harder for people to innovate for a number of reasons, because all the structures and the cultures all aligned around exploiting that business model as much as you possibly can. What we mean by that is that you know, that there is everything aligns around squeezing more and more out of what they’re doing at the moment, and the more that mindset becomes you know, entrenched the more the structures and the incentives become entrenched around that, it makes it very difficult to; establish a case for innovation, there’s the head in the sand or no this’ll keep on going or we’ve been successful before … and some people call it hubris when it’s particularly successful. I quite like a quote from Jim Collins’ book, as it ah … it’s about how the mighty fall, I think it’s called. And he talks about there’s a line that ramps up getting more and more vertical and he has stages and the hubris comes and then you see the crash. So, before every great company that crashed, there was a period of increasing success with an established business model. So I think there is an element of complacency and hubris but all the structures and all the thinking is around, we’ve got something that’s precious, let’s keep going, and it’s very, very hard to break out of that mindset – particularly if the organisation gets bigger, there’s a, humans are very social and collectively can convince each other of almost anything, we know that, look at all the good and bad through history. I think that happens as the organisation gets larger or more successful, so it’s very hard to break out of that.
Martin: And it’s tough I mean, as you’ve just said, you’ve almost kind of apologised for it Steve, it’s tough to be the man that stands alone and says something different, particularly to a very successful, traditional business. And look, to turn the blowtorch on myself, law is a classic example of that, isn’t it? You know, lawyers are doing very, very well right across the country and right across the world right now, running essentially the same business model that they ran 100 years ago. It’s about tailored solutions, bespoke highly crafted documents, and of course we see resistance from lawyers who as you say, have spent many, many years honing their craft, they’re highly intelligent people, to suggest that this could be replicated for $500 at the press of a button, of course it’s very hard to grapple with that.
Steve: Yeah. And we’re seeing that not just at law firms but most large, mature companies. They’re led by people who have been rewarded for doing business a certain way, and you need to be rewarded. So, if you’ve been rewarded for planning for executing perfectly, for building relationships, for not taking risks, for making money where you make money today, all that sort of stuff – the mindset, the processes and systems that support existing businesses and then suddenly someone says well you know what, you need to start taking risks, you need to start embracing failure, you need to forget this five year strategy plan and start with the one-pager and just go out and build some prototype and just, it’s a fundamentally different mindset and a fundamentally different way of doing business and even in the event where large organisations say look, let’s try doing things a bit differently, let’s go down to silicon valley and see how they do things and lets run some experiments. Even if some funding is committed to say a new experiment to build a new business model and that business model say, doesn’t generate ROI in the first six months, it gets killed. And that’s one of the things around the innovator’s dilemma. When a large organisation is making investment decisions around new products, new business models, it’s always about market size. How big is this market today? It’s always about the ROI, the net present value, the internal rate of return, these traditional investment metrics, and the thing about those metrics is the – and this kind of builds on Simon’s point about Jim Collins and that line going up, the thing about those metrics is that in order to make them look good, if you’re a senior leader, you focus on the short term – you focus on where you’re making money today. You definitely don’t invest in the so-called ‘disruptive innovation’ where the return may not be generated in 3, 4, 5 years if at all, and the risks are inherently higher so, the structures (and this goes back to the processes) incentives have not been designed in a way that supports investing in disruptive innovation either in most companies. So, and just to illustrate this, Air BnB. In their first year they generated $200 U.S. dollars a week. One of their co-founders, Brian Chesky, published a number of rejection letters from venture capitalists. This isn’t even leaders of a large company, this is venture capitalists who, their whole job is generally investing in start-ups in Silicon Valley, right? Fast forward a few years, once they figured their stuff out, once they learnt as much as they could and made as many changes as they could, this is what Simon was saying, to find product/market fit, today they’re worth $30 billion U.S. dollars. More than the market capital of the Marriott, the Hilton, and they don’t own any assets, so their ROA is astronomically bigger. That’s what we’re dealing with. But there is a way to explore that without throwing the baby out with the bathwater, and that’s something that we’ll get to shortly.
Martin: That’s great Steve, thank you. So, I think we’ve set the scene really well in this episode, we’ve articulated and positioned why material businesses are just really struggling to grapple with this, but also the risks if they don’t which can be enormous. So thank you gents, I hope it hasn’t been too negative for those listening but I just thought it was really important to set this scene. But don’t worry – in the next episode we’re going to flip it and we’re going to go into solutions mode, so thank you Simon and Steve.
Both: Thank you.